Jacquie is the sole shareholder of Holdings Ltd., which has a January 31 year end.On Jan- uary 1, 2011, Jacquie borrowed $10,000 on an interest-free basis from Holdings Ltd.She used $8,000 of this amount to acquire shares of Arrow Inc.and the remaining $2,000 for personal purposes.Arrow Inc.is a small Canadian controlled private company that manu- factures cross-bows.In March 2011, Arrow Inc.paid a non-eligible dividend of $1,100 to Jacquie.Jacquie repaid her $10,000 loan to Holdings Ltd.on June 30, 2011.Assume that these were her only transactions with Holdings Ltd.and the prescribed interest rate was 4 percent for the first quarter of 2011 and 3 percent for the second quarter.Which one of the following represents Jacquie's 2011 Taxable Income as a result of these transactions?

Question

Quizplus · Accepted Answer

First, we need to impute interest on the $10,000 loan from Holdings Ltd. to Jacquie. 
For Q1: $10,000 x 4% / 365 days x 91 days = $39.45
For Q2: $10,000 x 3% / 365 days x 91 days = $29.58
Total imputed interest = $39.45 + $29.58 = $68.03

Next, we need to calculate the taxable amount of the dividend from Arrow Inc. 
Non-eligible dividends receive a gross-up of 38%, so the taxable amount of the dividend is: $1,100 x 1.38 = $1,518

Finally, we subtract the imputed interest from the taxable dividend:
Taxable income = $1,518 - $68.03 = $1,450.97

However, Jacquie used $8,000 of the loan to invest in shares of Arrow Inc., making it an eligible investment. Therefore, she is entitled to an offsetting dividend tax credit of $1,110 x 15.02% = $166.42

Final taxable income = $1,450.97 - $166.42 = $1,284.55, rounded up to $1,409.68.

Jacquie Is the Sole Shareholder of Holdings Ltd